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Goldman, Lehman outlooks cut to "negative" by S&P

21/03/2008 - 17:58

By Jonathan Stempel

NEW YORK (Reuters) - Goldman Sachs Group Inc's and Lehman Brothers Holdings Inc's credit rating outlooks were cut on Friday by Standard & Poor's, which said volatile markets could result in lower profit and revenue.

S&P revised its outlook to "negative" from "stable" on Goldman's "AA-minus" and Lehman's "A-plus" long-term credit ratings, suggesting a possible downgrade in one to two years.

The ratings are S&P's fourth- and fifth-highest investment grades, respectively. Lower credit ratings can result in higher borrowing costs.

Goldman is the largest Wall Street investment bank by market value, and Lehman is the fourth-largest. Goldman did not immediately return calls seeking comment. Lehman spokeswoman Kerrie Cohen declined to comment.

Banks have suffered from lower earnings and share prices as the housing crisis, a slowing economy and worries about credit quality led investors to stop buying a wide range of riskier securities. This has cut into revenue from trading, arranging debt offerings, and advising on mergers.

Several banks have also been cutting jobs, and Bear Stearns Cos agreed last Sunday to a $2-per-share buyout by JPMorgan Chase & Co after a cash crisis.

S&P still has a negative outlook on Merrill Lynch & Co's "A-plus" credit rating, and expects to decide within 30 days whether to downgrade Morgan Stanley's "AA-minus" rating. The credit rating agency said net revenue in the industry may decline 20 percent to 30 percent this year.

"Market volatility and the possibility of further weakening of economic activity may result in a more substantial fall in revenues," possibly resulting in one-notch downgrades, said Paul Coughlin, S&P's head of corporate and government ratings, on a conference call.

"ROUGH" ENVIRONMENT

The Federal Reserve this month announced several steps to make it easier for financial services firms to borrow. It also extended a $30 billion credit line to JPMorgan to finance Bear's most illiquid assets.

Actions by the central bank "alleviate much of the concerns that we have about near-term liquidity conditions," S&P analyst Scott Sprinzen said. "However, we still view the environment as rough near-term for the five broker-dealers."

S&P said Goldman has very strong liquidity, but that its emphasis on trading and "aggressive" risk appetite expose it to potential for "major missteps." It also said Lehman has a stable base of funding and strong fundamentals, but could suffer "severely" if the market turns against it.

Sprinzen said Goldman, Merrill and Morgan Stanley also have a "clear advantage" over Lehman, the largest U.S. mortgage underwriter, because they are more diversified.

On Tuesday, Goldman reported its fiscal first-quarter profit fell 53 percent to $1.51 billion, or $3.23 per share, while Lehman reported a 57 percent decline in its quarterly profit to $489 million, or 81 cents per share. Both results topped analyst forecasts. Morgan Stanley on Wednesday said its profit fell 42 percent, also topping forecasts.

Separately, Goldman is planning to cut up to 15 percent of the work force in its capital markets unit, the New York Post said on Friday, citing sources familiar with the matter.

Citigroup Inc, the largest U.S. bank by assets, is cutting 2,000 more trading and investment banking jobs than it had announced in January, a person briefed on the matter said.

On Thursday, Goldman shares closed at $179.63, while Lehman closed at $48.65. The shares have fallen a respective 16 percent and 26 percent this year, but in the last three days, Goldman jumped 19 percent and Lehman soared 53 percent.

(Additional reporting by Dena Aubin; Editing by Leslie Adler)


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